Saturday, June 24, 2017

Possible Reasons

So, let us return to Kevin Drum'squestion. Why are Republican so determined, not just to loosen banking regulations, but to destroy the mechanism set up to ensure that a future bank failure does not set off a general financial crisis and tank the economy? Do they want another financial crisis?

I can offer a number of possibilities, ranging from the least to the most cynical. Here we go.

The Orderly Liquidation Authority hits a lot of red button issues for Republicans. It gives vast power to regulatory agencies, encourages international cooperation with financial management, and was supported by the hated Obama. This is the perfect combination of things Republicans most hate. They oppose the OLA for that reason.

Republicans are economic royalists. By that I mean that they believe the unregulated workings of the free market are sacred and infallible and always (by definition) produce the optimum outcome, not only for society as a whole, but for all individual actors. Capitalist, as agents of the free market, are answerable to the free market alone and no lesser mortal may ever question their actions.* Regulations on banks are bad because they restrict lending. Restrictions on credit are holding back the economy. And, in fairness to the Republicans, restricting lending probably is slowing growth somewhat. On the other hand, when banks are allowed to lend without restrictions, the result is invariably overlending, a bunch of bad debts, and an financial crisis. Republicans complain that financial regulations are inhibiting a potential boom, but it is only by inhibiting the booms that you can prevent the busts. Which leads to the next possibility.

Republicans are "liquidationists." The phrase comes from the alleged advice of Herbert Hoover's Secretary of the Treasury in response to the crash, "[L]iquidate labor, liquidate stocks, liquidate farmers, liquidate real estate... it will purge the rottenness out of the system." This was then and is now the conservative response to the bust that follows the boom. During the boom, economic royalists inveigh against financial restrictions that inhibit it. If financial restrictions are lifted and the boom grows greater, they tout it as success. When the bust invariably follows, they see it as deserved punishment for all the excesses of the boom and warn against doing anything about it. Such thinking takes several forms. The simplest is that the sacred and infallible free market will quickly correct itself if you sit back and do nothing, and that any inference will necessarily make things worse. Another is that the bust is necessary to shake out all the distortions of the boom and purge "rottenness," generally defined as debt and moral hazard. Many also believe that there is an inevitable bottom to be reached, and that the faster the economy hits the inevitable bottom, the sooner it will recover. Thus encouraging the failure of large portions of the economy is healthy because it anything that fails is obviously weak and something better will inevitably arise to take its place.

Of course, this raises a slightly awkward question. If the unregulated workings of the free market are so great, why to they lead to a boom-and-bust cycle in the first place? The usual answer, so far as I can tell, is that the real reason for booms and busts is that government protects people from the consequences of their mistakes, which introduces moral hazard into the system and allows for booms and busts. Each disaster averted only adds more moral hazard to the system and sets us up for an even worst bust down the line. If only government would stop interfering and allow the crash to proceed, no matter how bad, it would finally shake the moral hazard out of the system, scare banks into their senses, and end the boom-and-bust cycle once and for all.**

We certainly see evidence of that in how outraged Republicans were following the 2008 crash at any attempt to save the economy, not only by the elective branches of government, but also by the Federal Reserve. Of course, many people might suspect that Republicans' anger over attempts to save the economy has less to do with ideological dogma than with the party that controlled the White House. Which leads to my next theory.

The OLA allows regulators to wipe out shareholders and claw back bonuses to executives. I assume this is why banks hate the OLA so much. If it is why Republicans hate the OLA too, I suppose that might be considers a form of economic royalism -- just a particularly corrupt and cynical one.

Republicans are determined to destroy anything the Democrats may do, regardless of the consequences. Republicans have worked themselves up into such a lather of hate toward Obama and the Democratic Congress that they have taken a root-and-branch approach to destroying everything they do, regardless of the consequences. If repealing Obamacare strips 20 million people of their health insurance, if repealing Frank-Dodd leads to a new financial crisis, if tearing up the agreement with Iran leads to them getting a nuclear bomb, those are trivial concerns compared to obliterating the Obama legacy. And another, closely related, but more cynical possibility.

The harm is intentional, as a warning to future Democrats. Seen this way, the damage is meant as a clear warning, both to voters who may be tempted to vote for the Democrats and to Democrats who may be tempted to pass legislation if they win. It will be in vain. Republicans will destroy whatever you did, They don't care how much disruption they cause or how much harm they do. If you care, if you want to spare the country the disruption caused by ripping out well-established policies, then never pass any legislation of consequence because as soon as Republicans return to power, the WILL destroy it. If Democrats extend health insurance to 20 million people, Republicans will take it back. If Democrats end lifetime caps, Republicans will restore them and cut of vital, life-saving treatment in mid-course. If Democrats develop a plan to prevent financial crisis from spreading and crashing the economy, Republicans will make sure the next crisis does just that. If Democrats put limits on Iran's nuclear program, Republicans will take those limits off. And, I suppose, if the next time Democrats win the triple crown, they build a major infrastructure program, Republicans will take jackhammers to it when they return to power.

And then the most cynical explanation of all.

It is a clever bit of insurance if Republicans are relegated to the wilderness. Republicans are doing the best to conceal the nature of the healthcare bill in order to get it passed. But if it strips 10 to 20 million people of their health insurance, that just won't be possible to conceal. Nor will it be possible to conceal older customers seeing their premiums skyrocket, or people with pre-existing conditions find themselves unable to afford insurance to cover the care they need, or people abruptly cut off life-saving care when their lifetime limits run out. All of this could lead to a major backlash against Republicans and may lead to Democrats regaining at least one house of Congress in 2018 and the triple crown in 2020. It may even lead to an extended time in the wilderness for Republicans, just as did the Great Depression.*** If so (and it is by no means certain), what better way could there be for Republicans to stage a comeback than to set the economy up for another financial crisis and make sure that this time there would be no way to save the economy from the full force of the crash. Republicans would then blame the Democrats and ride a huge wave election to power.

Just for the record, I actually don't believe this last one. I don't think Republicans are looking that far ahead. And I do think they are economically royalist enough not to expect such an outcome. But when I am feeling very cynical, sometimes I think such thoughts.

____________________________________________*This doesn't quite mean claiming that no capitalist has ever made a mistake, but sometimes it can look a lot like it. For instance, during the 2008 crisis, economic royalists showed a marked reluctance to acknowledge that the financial industry or auto industry could be facing crisis because of mistakes by management. Instead, they blamed the financial crisis on loose monetary policy, Government Sponsored Entities (i.e, Fannie and Freddie), and the Community Reinvestment Act. Problems in the auto industry were blamed on unions.**Objection to any attempt by government to save the economy includes the view of tight money as a universal and timeless moral imperative to be maintained regardless of economic conditions. I should add here the Austrian School of economists, who believe that central banking and paper money cause the boom-and-bust cycle and that it could be avoided by abolishing central banks and going on the gold standard. Somewhat inconvenient to this viewpoint is that the US did, indeed, go without a central bank from 1836 to 1913 and was on a precious metal standard all that time -- gold and silver from 1836 to 1873 and gold only from 1873 to 1913. And the boom-and-bust cycle persisted the whole time. They are right, nonetheless, that a strict gold standard would prevent a boom-and-bust cycle. It would do that by so constraining the money supply as to cause an endless bust.***Then again, to judge from the results of special elections, many Republicans may rejoice in seeing so many of those people lose their insurance, or regard the loss of their own as preferable to letting liberals get the last laugh.